Principals face injunction risk if recourse to security is not made before the obligation to return arises

Important practical implications for principals and contractors 4 min read

The Court of Appeal of the Supreme Court of South Australia has granted an interlocutory injunction restraining a principal under a construction contract from making a demand against security, on the basis that there was a serious question to be tried about whether that security ought to have been returned to the contractor.

In this Insight, we consider Synergy Construct Australia Pty Ltd v GSA North Terrace Pty Limited ATF GSA North Terrace Unit Trust [2025] SASCA 72 (Synergy), where the South Australian Court of Appeal determined that a principal under a construction contract was precluded from making a demand upon bank guarantees where there was a serious question to be tried about whether the principal was required to return or release the bank guarantees.

Key facts

The principal (GSA) engaged the contractor (Synergy) for the design and construction of a building in Adelaide. In the usual way, the contract required Synergy to provide bank guarantees as security. A dispute arose when GSA foreshadowed making a demand against the bank guarantees. Synergy contended that the bank guarantees should have been returned or released by that time and that an injunction should be granted restraining GSA from having recourse to the bank guarantees.

The primary judge accepted that there was a serious question to be tried, but declined to grant the injunction. The primary judge considered that the bank guarantees were risk allocation devices and that in those circumstances, preventing the guarantees from being called on would disrupt the 'status quo' as agreed by the parties. On that basis, the primary judge refused to grant injunctive relief. The contractor appealed.

The decision

The Court of Appeal allowed the appeal and granted the interlocutory injunction.

Characterisation of the bank guarantees

The court held that the bank guarantees in issue were properly characterised as 'risk allocation' devices such that the contractor was required to 'pay now, argue later'.¹ However, once the principal was required to return the bank guarantees, it was precluded from making a demand upon them.² As such, the bank guarantees were only intended to allocate the risk of dispute up until the point when they were required to be returned or released.³ In those circumstances, where there was a serious question as to whether the bank guarantees should have been returned, the 'risk allocation' function of the guarantees was not determinative of the balance of convenience.⁴ This was because there was a dispute about whether this 'risk allocation' function persisted.⁵

Application of the ordinary principles relating to interlocutory injunctions

The court held that, although there are many judgments specifically involving injunction applications in respect of bank guarantees, such applications are still ultimately determined in accordance with ordinary principles.⁶ The ordinary principle is that the applicant must demonstrate a serious question to be tried and that the balance of convenience is in favour of granting an injunction to maintain the status quo.⁷ The characterisation of security as a 'risk allocation device' is often involved in applying this test, but it does not 'dictate' the outcome.⁸

The court identified two bases upon which the contractor demonstrated a serious question to be tried:⁹

• The principal may have been required to return the security under the original contract by operation of the defect liability period regime, and as a consequence of the final payment claim/certificate.
• The principal may also have alternatively been required to return the security on an accelerated timeline that resulted from a side deed the parties entered into in respect of the security and some disputed defects.

The court did not finally determine either of the above questions. However, it was satisfied that there was a serious question to be tried about whether the principal was still entitled to retain the security.¹⁰ This meant there was also a serious question as to whether the principal was still entitled to the benefit of the 'risk allocation' function of the guarantees.¹¹

When considering the balance of convenience, the court found that the prejudice to Synergy was substantial if the injunction were refused. That could not be devalued based on the risk allocation in the contract (since that risk allocation had arguably ended).¹² The court also noted that the principal had not identified any specific prejudice.¹³ As a result, the court granted the injunction.

Insights

This case has important practical implications for principals and contractors, including that:

• a right to make a demand on a security under a construction contract will generally be conditional on the right to continue retaining the security at the time the right is exercised;
• the 'risk allocation' function of bank guarantees under a construction contract only persists for as long as the principal is entitled to retain the bank guarantees; and
• where there is a serious question to be tried about whether the contractor is entitled to retain the security (as distinct from the right to call upon it), the 'risk allocation' function of the security may be given less weight in the balance of convenience in injunction applications.

In light of this case, principals will want to carefully consider the inclusion of an express right to call on (and have recourse to the proceeds of) security, even where there is a bona fide dispute about whether the principal is entitled to still hold that security.